The "Rebate Program" would work like this, according to the draft: If, based on the bids received and accepted for an item, we determined that the single payment amount for the item was $100, Medicare payment for the item would be 80 percent of that amount or $80, and the co-insurance amount for the item would be 20 percent or $20. However, if a contract supplier submitted a bid of $90 for this item and chose to offer a rebate, the rebate amount would be equal to the difference between the single payment amount ($100) and the contract supplier's actual bid ($90) or $10. Therefore, after the contract supplier received the Medicare payment of $80 and the $20 co-insurance, the contract supplier would be responsible for providing the beneficiary with a $10 rebate.

If a provider bids low enough, and the rebate ends up being bigger than the co-payment, a beneficiary could end up making money on the rebate. The rebate also could encourage some providers to bid low so they get a rebate and then use it as a way to entice beneficiaries to do business with them, say industry watchers.

To many, that smells like an inducement, similar to waving a co-payment. And as most providers know, such inducements are illegal.

"My initial reaction is that it raises a lot of issues under healthcare law," said industry attorney Asela Cuervo. "I've been told that CMS acknowledges that this might be a problem. A lot will depend on whether this provision survives the comment period."

According to the draft document: Our reasons for allowing these contract suppliers to offer rebates is to allow beneficiaries the ability to realize additional savings and the full benefits of the Medicare DMEPOS Competitive Bidding Program.

"What in the world are they thinking?" said Jim Walsh, president of VGM Management. "The whole point is to make patients careful shoppers of durable medical equipment, and what do we have instead--an incentive to get more equipment."

If a provider decides not to offer the rebate, he pockets the money. However, if he opts to give the rebate, he can't do it on a case-by-case basis. He must offer it to all beneficiaries who receive the competitively bid item.